VAT (Value Added Tax) is an official tax that businesses must pay for their products and services. Businesses are also liable to pay VAT on commercial energy usage.

The process of VAT registration and payment can be complicated and frustrating for a business owner. So, here is a guide to help you go through the process with ease.

Do you have to pay VAT on business energy usage?

Every company has to pay VAT on business energy use. As a business owner, you have VAT on the energy you consume for your profession, whether you are at your home office or business premises.

Your energy provider will initially assume the standard VAT percentage and include it on your business energy bills. The VAT will not be included in a quote from business energy providers. You must calculate the cost separately before you agree to use an energy company.

However if your business is VAT registered, then you should be able to recover the VAT as input tax on your business expenses, subject to the normal VAT deduction rules.

Visit this page to find the best energy provider to cover your business needs.

What are the business energy VAT rates?

Business energy VAT rates depend on the type of business you own and the way you use energy. Most businesses in the UK pay the standard 20%.

However, you have the chance to pay a reduced VAT rate at 5% if you meet one of the following conditions:

  1. Your business is eligible for a reduction.
  2. Your place of business is eligible as 'mixed use' (i.e. used for both domestic and business purposes).
  3. Your business falls under the category of 'de minimis' (This is a set level know which is considered the minimum. When the electricity and gas you used drops below this level, then you can pay the reduced VAT price)

Your energy usage is considered low when:

  • Your business uses lower than 33kWh of electricity (1,000kWh a month).
  • Your business uses lower than 145kWh of gas (4,397kWh a month).

The discount should automatically be applied to your bill by your energy supplier after you provide them with a valid VAT certificate.

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Is it possible to claim back VAT on your business energy bill?

Even though paying VAT is a business-to-business transaction, you cannot claim back the VAT on your business energy bill.

However, you can pay the reduced rate of 5% if you fulfil certain criteria. For example, when:

  • you use less than 40% of your energy for business purposes
  • your business is a not-for-profit organisation or charity

You can claim a partial refund if you were paying the default 20% while being eligible for a lower rate.

The government's advice states that you have the ability to reclaim the 20% of the VAT on your energy bills when you work from home. This only applies to the energy you used for domestic purposes and not for commercial usage.

You can have a look at the UK government's guidelines on their official site about VAT on commercial energy bills.

Tips for cutting down VAT on your gas and electricity bills

The easiest way to reduce your VAT expenses is for your business to qualify for the reduced rate. If your business is eligible for a discount, you must apply for it separately.

Another way to pay less business energy VAT is by working from home. VAT on domestic energy is charged at a rate of 5%. In this case, you must prove that at least 50% of your household's energy usage is for business purposes.

Here are some factors to consider when managing your business energy usage:

  • Unit rate: It is the expense of the gas and electricity you use, and it is measured in kilowatt-hours. A lower unit rate will help you pay less for your energy.
  • Standing charge: This the daily rate that energy suppliers charge to afford to supply energy to your property. You can reduce your energy costs by switching to an energy deal with a lower standing charge.
  • Contract end date: You can only switch business energy supplier to find a better deal when your current deal ends, so it's important to know the end date.

Frequently Asked Questions

A reduction of 5% VAT on your business gas and electricity bills is possible if your average daily usage is no more than 145kWh of gas per day and 33kWh of electricity.

Find more details about VAT rates from our dedicated team at Business Energy UK.

You are legally obliged to register your company for VAT if your turnover is above £85,000 a year. If your annual turnover is less, then it is optional for you to register.

Once you register, you will receive a registration certificate from HMRC to confirm your business' VAT number, the date of your first payment of VAT, and the date of registration, which could be the date that you exceeded the threshold.

The CCL (Climate Change Levy) tax was created to improve energy efficiency and reduce gas emissions. It aims to make UK businesses environmentally aware and responsible.

There are two CCL rates:

  1. The standard levy - If you pay 20% VAT on your business energy usage, then you are also liable to pay the CCL.
  2. Carbon price support - This type of CCL is reserved for the owners of power stations which generate either electricity or CHP (power and heat) stations. You will not pay this tax when your business generates energy for itself and gains income through the Feed-in duty.

The CCL rates are adjustable every financial year. You may be eligible to exempt from the main rates of CCL, especially if you qualify for a reduced rate of VAT.

If you don't qualify for a CCL rate exemption, you still receive a discount on the CCL by signing a CCA (Climate Change Agreement). A CCA involves agreeing to implement improvements and reductions on your business's energy consumption and its emissions.

There is no VAT exemption on business energy usage. However, some businesses may qualify for the reduced rate of 5%. Businesses that qualify for reduced VAT include:

  • A charity or a not-for-profit organisation (even when they offer paid services)
  • Children's homes (hospitals and prisons are excluded)
  • Hospices
  • Care homes for the elder or disabled, those with a drug or alcohol dependence, or people with mental disorders
  • School and university student accommodation
  • Self-catering vacation accommodation
  • Monasteries and other places of religious communities

You can apply for a lower VAT rate by submitting a VAT Declaration Form, which can be obtained from your energy supplier.

With this form, you can claim a partial refund for any overpayments within the past 4 years, either from your energy company or from HMRC. Otherwise, you can apply for the reduced VAT rate of 5% if your business meets the relevant requirements.